Eurozone Update

European financial markets started this week with a new reality. They had the weekend to absorb news that Standard & Poor's downgraded the credit ratings of nine European countries - including France, which lost its triple-A status. These countries face exposure to financial trouble in Greece, among other places.

We're going to talk about this with Zanny Minton-Beddoes, the economics editor of The Economist and regular guest on our program. Zanny, welcome once again.

ZANNY MINTON-BEDDOES: Hi. Good to be there.

INSKEEP: I was wondering if European markets would plunge the way that markets plunged when U.S. credit was downgraded. But things don't seem to be that frantic.

MINTON-BEDDOES: They don't because, you know, this wasn't a great surprise. It was a question of when it was going to happen, not if. It had been pretty well telegraphed that France was likely to be downgraded. So I think, yeah, in the short term economically it's not such a huge deal. The euro is a bit weaker this morning, but French bond yields are only up slightly. I think it's very important deal politically in France.

INSKEEP: What do you mean by that?

MINTON-BEDDOES: Well, you know, this is very bad news for Nicholas Sarkozy, the French president, coming less than 100 days from the elections. Because he had, he'd long put a very high priority on keeping France's Triple-A. He said once, I think in last September, that it was his one objective and one obligation to maintain the Triple-A. And though he's been playing it down in recent weeks as it's become clearer that a downgrade is likely, it's still a very, very tough thing for him to deal with domestically in France because obviously all his political opponents have jumped on this, and it's also harder for him to stand next to Chancellor Angela Merkel, who Germany's still now the only big European country with a Triple-A status, and claim that he is somehow her equal in this European crisis. So I think it's a sort of psychological and political blow for France more than a big short-term economic issue.

INSKEEP: Oh well, let's talk about that though, because you mentioned Sarkozy and Merkel trying to work together, Sarkozy trying to stand as Merkel's equal, and they've been trying to lead the way out of this European debt crisis, which is of great concern to the continent and great concern to the world. Is the downgrade going to make it harder for Europe to get to safe ground?

MINTON-BEDDOES: Well, it is in two ways. Firstly, because I think it does affect the political dynamic between those two powers. But secondly and more importantly immediately, it's actually quite bad news for Europe's rescue funds, because the way Europe has structured its own rescue funds, they are based on issuing bonds which are backed by effectively the Triple-A countries' guarantees.

INSKEEP: Hmm.

MINTON-BEDDOES: Now, if you have fewer Triple-A countries in Europe, then you have weaker guarantees, which means that the European rescue fund bonds, they may have to pay more for those bonds. So it actually makes the kind of process of raising money to rescue weaker countries - Portugal, Ireland - more expensive and harder. But I...

INSKEEP: The strong guys who are supposed to be guaranteeing debt here are looking weaker. That's what you are saying.

MINTON-BEDDOES: Absolutely. Absolutely. And I think if you sort of stand back a bit, it's also symptomatic of a longer term and quite negative spiral in Europe, which is this nasty spiral between austerity leading to weaker growth, leading to recession, leading to the debt and deficit numbers looking worse, which in turn leads to more austerity, and it's a rather nasty downward spiral, and that's part of the reason that France is downgraded and I think that's something that we're going to see even more of across-the-board in Europe because the eurozone is now almost certainly in recession, and it's not clear to me how it gets out of it very quickly.

INSKEEP: And of course the country that has been leading the way in that spiral is Greece, and talks on restructuring privately held Greek debt just broke down. What happened?

MINTON-BEDDOES: Absolutely. This may actually turn out to be rather most significant than the French downgrade, I think. The talks broke down on Friday. These were talks between Greece's private sector creditors - the banks, basically - about the terms of a quote-unquote "voluntary agreement" to restructure Greece's private debt. And these bankers had agreed in principle a few months ago that they would agree to a 50 percent cut in the value of their debt. And what they've been haggling over in recent weeks is the terms of that deal. Now, what kind of a loss a 50 percent cut translates into depends on what kind - what the new bonds are like, what their maturity is, what their interest rate is...

INSKEEP: Mm-hmm.

MINTON-BEDDOES: ...and that's what they've been haggling over. And they've been haggling over that against an increasingly dark backdrop for Greece.

First of all, the numbers from Greece keep getting ever worse, the situation there keeps getting ever more dire, and most people think they need much more than a 50 percent debt reduction. And so the question is how big a real debt reduction do they need, and will the private sector creditors agree to that?

And there's also some pressure on timing because on March the 20th, Greece is due to pay a 14.4 billion euro bond repayment, which means that if they don't have an agreement before then, or Greece doesn't get money from somewhere before then, it's going to default on its debt. And so increasingly there's this fear that there will actually be a chaotic default of Greek debt.

INSKEEP: In just a couple of seconds, is it possible this 50 percent write-down on Greek debt, that even that basic deal could fall apart?

MINTON-BEDDOES: I think it's certainly possible. I think that they're quite far apart and Greece's numbers look so dire at the moment, it's just not clear that even, even a bigger write-down might not be enough.